A presentation by the deputy director for innovation policy, Mr. Fergus Harradence @ a talk organized by the Entrepreneurs Interactive Society, Imperial Business School

1. Innovation Policy Fergus Harradence Deputy Director, Innovation Policy Please sign-up for our future events in London: bit.ly/EInteractive

2. 2 Aims of Innovation Policy “To make the UK the best place in the world to run an innovative business, public service or third sector organisation” – Innovation Nation, March 2008 Current Context: The UK needs innovation across economy to see a return to sustained economic growth In a rapidly changing world, faced by large-scale challenges, innovation is a key imperative for business across all sectors, government and the third sector There is substantial evidence on the links between innovation and growth. Growth correlates with business R&D investment and with other forms of innovation expenditure There is a major role for the public sector in shaping private-sector innovation capability, and addressing the limitations of markets

4. Economic benefit to society from diffusion technology

5. Social benefits from creation highly skilled employment

7. 5 5 UK Innovation Policy: Rationale Just 6% of companies employing 10+ people are high growth. These companies were responsible for over half the jobs created between 2005 to 2008, and are more likely to be innovative In the US, only 5% of companies are high growth ones High growth companies are defined as those experiencing annual 20% growth over a three year period Innovative firms grow twice as fast as non-innovative ones. For example. Firms introducing a new product (2002 to 2004) saw average employment growth of 4.4% during the subsequent 3 years (2% for non-innovators). Innovators saw 10% growth in turnover; 5.8% for non-innovators

8. 6 6 UK Innovation Performance UK R&D as share of GDP in 2007 was 1.6%, lowest in G7. However R&D is not the only source of innovation – much of the productivity increase recorded in the Innovation Index came from investment in product design, training in new skills, organisational innovation, new customer offering and brands and copyright. On the definition used in the report, total investment in intangible assets was £133 billion in 2007, just over 14% of GVA. This is higher than total business investment in “tangible” assets (e.g. plant and machinery). The largest components of this total are training (£32 billion) and organisational improvement (£26 billion). Business R&D by comparison is just under £15 billion. As a % of GVA, “intangible” investment peaked in 2003, falling slightly since. This is largely due to a drop in expenditure on design, marketing and advertising.

10. 64% UK companies now innovation active (CIS 2008)

12. 2007-08, there were 1,573 projects, of which 253 were R&D operations, and 182 advanced engineering. The UK is the best place in Europe and 5th best country in the world to do business (World Bank)

13. 8 Future Challenges Over 60% of firms with 10+ employees are active in innovation but firms innovate in very different ways and policies must respond to that. All sectors of the UK innovate but innovation activity is very unevenly distributed – typically, 20% of firms account for about 80% of innovation output in a particular sector at any given time. There are strong links between these UK firms and the research base but they need better channels (centres and intermediary bodies) focused on meeting business needs at the national level. The UK spends less on R&D as a share of national output than many other leading nations but business investment in intangibles (R&D but also software, training, design, etc. ) is about 14% of market sector GVA – a higher percentage than for tangible capital assets.

14. 9 Future Challenges We expect firms to cut back on innovation investments in a downturn. However, while there are some indications of cutbacks there are other indications of businesses seeking to protect investments such as R&D that maintain their long-term competitiveness (70 percent of the companies in the Booz Allen Global 1000 survey plan to maintain or increase R&D outlays). Innovation is becoming increasingly global – increasing both the scope for collaboration and the degree of competition. Securing financial resources from the market to innovate might remain a challenge. In 2007, 23% of UK business R&D was financed from overseas, the highest proportion in G7. Competition to secure investments by multinationals is intense. The challenge is to maintain sustainable segments of global innovation value chains. Many historic innovations were generated during previous recessions: - The development of neoprene, nylon and TV saw significant advances during the Great Depression. - Apple and Microsoft were famously both founded during recessions.

15. 10 10 UK R&D Investment

16. 11 Support for Innovation Technology Strategy Board Has a budget of £761 million between 2008-11; this funding will be aligned with funding from Research Councils (£120m) and Regional Development Agencies (£180m) Activities: provides grants for R&D, facilitates networks, knowledge transfer, utilises procurement to support innovation (SBRI, vehicles demonstrator, challenge competitions) Department of Health Research Budget of £1.5bn, central and regional innovation initiatives. Invention for innovation (i4i) and SBRI. Ministry of Defence Research Budget of £2.5 billion – runs competition for ideas, challenge competitions, Centre for Defence Enterprise, SBRI. Regional Development Agencies Support SME innovation, innovation infrastructure, work with TSB on larger projects.

17. 12 Venture Capital: Public Sector “It is instructive to observe that all venture capital markets of which we are aware were initiated with some form of government support. These markets do not appear to emerge without some form of assistance.” Professor Josh Lerner, Harvard Business School Empirical research in the US has shown that VC backed firms are: More innovative and produce more and more valuable patents (Kortum and Lerner, 2000). They are faster in developing their products and introducing them to the market (Hellman and Puri, 2000). They have a higher rate of executive turnover, which reflects faster managerial professionalisation (Hellman and Puri, 2000, 2002). Bottazzi and Da Rin (2002) indicate that a wide consensus exists among economists, business leaders and policy-makers that a vibrant venture capital industry is a cornerstone of America’s leadership in commercialization of technological innovation.

18. 13 Venture Capital: The Public Sector Role The US economy (in which VC has been active for the longest) is the best example of this. “American companies that received venture capital from 1970-2006 accounted for 10.4 million jobs and $2.3 trillion in revenues in 2006. The total revenue of venture capital-financed companies comprised 17.6 per cent of the nation’s GDP and 9.1 per cent of private sector employment in 2006.” In the UK: “The largest recent survey (2007) showed that over the five years to 2006/07, firms backed by venture capital increased their worldwide employment by 8 per cent per year, a much higher rate of growth than the 3 per cent reported by most mid-sized companies.” NESTA, Reshaping the UK economy: the role of public investment in financing growth, 2009

19. 14 14 Public Support for VC in the UK Research by NESTA highlights that the public sector already accounts for 57% of all UK VC investment Shifting sands: The changing nature of the early-stage venture capital market in the UK, NESTA 2008 Investment: Invest directly in a range of VC funds – not in companies Regional VC Funds University Challenge Funds Enterprise Capital Funds UK High Tech Fund of Funds UK Innovation Investment Fund Fiscal Incentives Enterprise Investment Scheme Venture Capital Trusts

20. 15 15 Why The Public Sector Can Invest in VC Effectively Time: VC is a long-term industry – public sector can afford to adopt a long term perspective Circumstance: Public sector less affected by economic up and downswings; can leverage capital even during a recession Critical Mass: Considerable amount of capital tied up in public sector – spending c40% GDP, but also public sector pension funds etc Co-ordination: Links to wider policy - e.g. tax, support for science, R&D

21. 16 16 To Conclude Innovation is a key element of sustainable economic growth Public Sector has a role in supporting innovation Support comes in a variety of ways from a variety of organisations Support for venture capital is a key element of this